Dividing IRAs, 401Ks, and Pensions in Divorces

Are Retirement Benefits Community Property in a Divorce?

Retirement accounts, such as IRAs, 401Ks, and pensions are unique in that they can only be held in one person's name. However, any contributions made during a marriage are considered community property, regardless of which spouse earned the money. It is not uncommon for one or both spouses to have had retirement accounts prior to the marriage, in which case any contributions made before the marriage would be considered separate property. Dividing these types of accounts during a divorce can be complicated, as it requires distinguishing between separate and community property, taking into account factors such as interest and changes in the account's value.

Dividing Pensions and 401Ks in a Divorce

Sometimes divorcing couples agree not to divide their retirement assets and instead will allocate the value of the retirement funds owed to each party using other assets that are easier to divide. However, if retirement funds are divided, certain rules must be followed to avoid severe tax penalties. For instance, any retirement plan offered by a private employer, such as a 401K or pension, is subject to the Employee Retirement Income Savings Act (ERISA), a federal law that permits dividing some retirement plans during divorce without tax penalties.

To divide retirement plans governed by ERISA, a court must issue a Qualified Domestic Relations Order (QDRO), specifying how retirement plan assets will be distributed in a divorce. A QDRO is separate from the divorce decree and must conform to both state and federal law, as well as the specific requirements of the retirement plan.

Dividing IRA's in a Divorce

IRAs are not subject to ERISA and therefore require a different method of division in divorce. To avoid tax penalties, funds from an IRA can be transferred to a former spouse only if the transfer is explicitly provided for in a divorce decree or settlement agreement that is incorporated into the decree. The decree or settlement agreement must clearly state the amount of funds to be transferred to the former spouse and be sent to the IRA administrator. The spouse receiving the funds must then establish a new IRA. Upon receipt of the decree, the administrator will divide the IRA as directed by the decree and transfer any funds owed to the former spouse into the new IRA. This transfer is defined as a transfer incident to divorce, and neither party will face tax penalties on the transfer. If an IRA is divided in a different manner, the account holder will be subject to tax penalties.